David & Goliath: Small Biotechs Wage a Big Fight Against the Superbug

Despite amazing strides in many areas of medical technology, Big Pharma lags small caps in the fight against the antibiotic-resistant superbug MRSA.

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Trouble was in the air over antibiotic-resistant microbes long before 2004 when the Infectious Diseases Society of America (IDSA) released its report, "Bad Bugs, No Drugs: As Antibiotic Discovery Stagnates...A Public Health Crisis Brews." The study recommended the development of new antibiotics to combat the threat. However, the development of new antibiotics is costly, and so Big Pharma didn't take up the fight. In fact, since the 1980s, the number of new systemic antibiotics approved by the FDA has fallen off alarmingly, from 16 in 1983-87 to just two in the last five years, according to the IDSA. Fortunately, some small cap biotechs are filling the space with effective alternate solutions.

What's now a global epidemic began decades ago when certain bacteria started to evolve and grow resistant to "older" antibiotics that were penicillin-derived. Then, with continued and steady use, even newer antibiotics met the same challenge. This set the stage for a virulent, life-threatening type of staph infection, Methicillin-resistant Staphylococcus aureus (MRSA), which currently plagues health care institutions worldwide. Immunosuppressed patients in hospitals or on long-term care who are subject to invasive procedures like catheter insertions, or who have open wounds, are most vulnerable.

The pipeline of new antibiotics to help fight MRSA has stalled dramatically as Big Pharma has turned its attention to the development of more profitable drugs. Yet perhaps with this highly adaptable suberbug, a novel approach makes more sense.

Big cap pharmaceuticals have not turned their back on the problem completely: Pfizer (NYSE:PFE) and GlaxoSmithKline (NYSE:GSK) are developing MRSA vaccines. Even IBM (NYSE:IBM) is exploring an approach using "ninja polymers" -- defined as "sticky nanostructures that move quickly to target infected cells in the body, destroy the harmful content inside, and then disappear by biodegrading without causing damaging side effects or accumulating in the organs," according to an IBM research blog. However, small cap biotechs like Cubist Pharmaceuticals (NASDAQ:CBST) and microcap Oculus Innovative Sciences (NASDAQ:OCLS) offer exciting solutions that are already making a difference.

Already profitable, and ranked among the top of Fortune 100's fastest growing companies in 2010 and 2011, the small cap biotech Cubist Pharmaceuticals has already been dubbed "a great spec" by Jim Cramer. The company's revenues are derived mainly from what might be one of the most successful antibiotic introductions in biotech history: intravenous antibiotic Cubicin, an injectable form of daptomycin, and the first in a new class of antibiotics called lipopeptides.

Oculus Innovative Sciences has another game-changing treatment in the fight against antibiotic-resistant superbugs. Its topical formulation Microcyn is a pH-neutral solution of non-irritating hypochlorous acid and sodium hypochlorite. The formulation is very effective in wound care and dermatology, with a 2-year shelf life and no toxicity concerns. Because it works through chemistry that mimics the body's natural defense system, it does not cause resistant bacteria to evolve. Microcyn is also under consideration for use as an irrigant during surgical procedures, which could mark an important stage of development for Oculus into a multi-billion-dollar market. Currently, saline is used most often in surgeries, but Microcyn offers important anti-infective properties, while being equally non-irritating, according to Life Sciences Report.

With the incidence of diabetes on the rise, treatment of diabetic foot ulcers alone is a huge market. Microcyn has already earned praise for its efficacy in the treatment of difficult-to-heal diabetic foot ulcers. In fact, with its topical use, the need for oral antibiotics for this type of wound can be completely eliminated. One doctor, Cheryl Bongiovanni, M.D., director of the Vascular Wound Clinic at Lake District Hospital in Oregon, has reported: "It wouldn't matter if Microcyn cost $1,000 per bottle, because Microcyn saves so much money by simply shortening the course of treatment so dramatically."

Despite glowing praise for Microcyn and a growing revenue stream fueled by a pipeline of products available in the United States, Europe, India, China, Mexico, and select Middle East countries, Oculus faces risks, including the high cost of clinical trials and upcoming FDA approvals. Even worse, despite so much good news about Microcyn, the company is trading at an all-time low of around $0.40 per share.

Still, the company is knocking on the door of profitability and recently reported healthy numbers. Record revenues of $4.5 million for Q2 2013 were up almost 25% from the previous year. Its cash position of $8.3 million is also sharply higher, from $4.9 million in the previous year.

Another catalyst that could positively impact Oculus's stock price is the recently approved plan to spin off the company's novel drug RUT58-60 into a separate company. The new company, Ruthigen, will be headed by the former CEO and founder of Oculus, Hoji Alimi. He will be replaced at Oculus by Jim Schutz, an attorney with a track record of success that includes heading up an international medical device company. The management shake-up could signal a change from visionary scientist leadership to a commercially focused CEO.

Mr. Schutz said, "Our VP of R&D is a world-class scientist. We intend to remain multiple steps ahead of competitors in terms of next-generation technologies." Mr. Schutz set out a detailed strategy, with a "commercialization mantra" that includes, "Adding new products, organically and via acquisition, for our current partners." He also said that among the strategy changes he will implement, "We'll stop selling stock to fund our operations."